Tubular Belles

If baby boomers day dream about winning the lottery, Gen Xers just fantasise about selling out to Google. In their video message to the YouTube community announcing their sale to Google - founders Chad Hurley and Steve Chen could barely suppress their grins. And by the end of the clip, they were killing themselves laughing. I don't blame them. US$1.65 billion buys a lot of Ferraris and pina coladas. But as with all big media deals - the 'what' is never half as interesting as the 'why'.

When Fox bought MySpace everyone sucked in a quick breath on the price, but breathed out a sigh of relief when they digested the size and scale of the traffic. Even at the time of the deal, it was already one of the world's biggest sites. Most people, even stock analysts, understand the idea of page views. If MySpace was doing more traffic than Google, it must be worth something. You could look at the YouTube deal the same way. But you would be missing the main point. One, I think, that the management of Google grasped immediately.

In the conference call immediately after the deal was announced, Google CEO Eric Schmidt explained that the major reason why Google needed YouTube when it had its own highly evolved video product, was due to the social media aspects of the network.  “That’s what really drove us to begin the conversation" - said Schmidt. The value of YouTube to Google therefore, and to media companies in general is not the number of people who turn up each day to watch streamed video clips - but the connections between the audience members themselves.

Audience networks are the key. To understand how media is changing today you have to look past new technology, and focus instead on changing audience consumption patterns. Consumers are more connected than ever before. They don't just watch a TV show or listen to a pop single. They blog about entertainment, rate and tag content, forward links to podcasts, post video clips on their web profiles, or just group email stuff around. The era of passive media consumption is being replaced with something requiring far more audience involvement. Its what I call 'Networked Media'.

Thats why despite the hype, the real 'why' of the YouTube deal has nothing to do with software or traffic.  As it stands, Google Video was already a seriously impressive piece of engineering. The search technology was slick, and unlike YouTube's service, you could easily download clips straight to your computer, iPod or even Sony PSP. And what's more, you could even set the video results of your search to play concurrently. But there is one thing that was missing from Google Video that really set YouTube apart. Community.

A year on from the MySpace acquisition, it is pretty clear that the real value of the site was not the eyeballs at all - but the structure of the user base itself. MySpace users are not only numerous, they are highly interdependent and self organising. The reason why the music charts are so full of new entrants discovered on MySpace is not just because because the site has lots of members. It is due to the ways in which MySpace users interact. New ideas, brands, and entertainment products replicate through the network like wildfire as users comment, forward, issue bulletins or simply post media content directly on their profiles. In many ways, YouTube is a mash up of the personalisation aspects of MySpace with the organisational logic of Flickr. Flickr, a photo sharing site sold to Yahoo for what now looks like an absolute bargain, basically wrote the guidebook on how to use social networks to give context and meaning to media content.

That's not to say that YouTube was overvalued or can be easily copied. Creating a platform that features deep connections between consumers is a seriously tough trick to pull off. With the exception of Brazil, Google's Orkut experiment dramatically failed to penetrate the broader world user base. It is a curious characteristic of social networks, that depending on the geographic concentration of certain social cells - you can find deep pockets of usage in some countries, and a total absence in others. Hence Friendster is a big hit in the Phillipines and Malaysia, and Bebo in the UK. Elsewhere, less so. Indeed, whether a particular social network ever hits critical mass seems to owe as much to planning as sheer dumb luck.

And that is likely to be one of the lasting ironies of the rise of YouTube over the last eighteen months. The highly distributed nature of the service, which allowed users to embed video streams on other websites, meant that much of the traffic to the network actually originated from elsewhere. Fox was certainly under no doubts as to where that might have been. Late last year, News Corp chief operating officer Peter Chernin told investors that 60-70% of YouTube traffic actually came from MySpace.

Over the next year or so, there is little doubt that the consumer usage of online video will rise dramatically across the board. And sure, there will be some television networks who either get tired of suing start ups or dealing with upstart platforms and try and go it alone. And then there will be others which experiment with a range of different business models with the Googles, Yahoos and MySpaces of the world. Either way, we are accelerating to a future in which every piece of entertainment content will be easily available online.

And you can be sure of one thing. Networked Media is here to stay. 

Comments

[peter fox]

Would really like to show you what we are doing @Visionbytes.
Hope to meet with you!

[Tim Macdonald]

Nice piece, Mike. When the dust settles on this deal a year or less down the track, my vaguely-educated bet is it'll be a good move for Google. It simply allows the big G to spread its wings into other ad formats and product-communities. With another $10 bil in spare cash to splash around, they've also got room to experiment and make YT work commercially.

My hat's tipped to Chad & Steve & everyone working for them. Creating $1.65 billion only 20 months from Day 1 is hard to fathom, & it's possibly even more impressive than Google's achievement in the same time.

[Neil Pharazyn]

The interesting thing will be when someone figures out how to monetize Networked Media traffic. Imagine 1 cent earned on every video viewing.

[Kristofer Rogers]

Your concept of ‘networked media’ is a hot ticket. In fact, do any 4th Estate readers disagree? I think not…

What intrigues me is the time line. Whilst the innovation behind online social networking was developed by one generation (Gen X), the adoption of the technology, and therefore its true success, rests with another (Gen Y). One could argue that advances in technology and connection speed have determined the impact of online content - i.e. if those advances had happened earlier, Gen X would have demonstrated equally rabid online habits.

But I think it’s more to do with the generation - Gen Y is particularly tribal by nature, and online social networking caters for their vast appetite for shared information. Not for the first time, we’re seeing social trend determine the future of media, not the other way round.

[Marcus Verrall]

ZZZZzzzzzz….

Another obvious thought regurgitation from Mike, being blindly impressed by the dollars and skimming over the deeper implications.

You throw around comparisons between YouTube and MySpace in the “Networked Media” arena, yet mention nothing about the potential conflict between these properties once the lawyers work out how to attack it. Do you really think that Fox will continue to allow YouTube to broadcast it’s content now that it has a rich owner? Not to mention continue to provide the majority of it’s traffic. I mean, think about it…

I actually don’t know where to start when considering a response to your article, as it is more remarkable for what it omits than anything. Then, to assert that YouTube achieved success and acceptance through dumb luck… are you insane? This annoyed me so much I had to comment, moments after unsubscribing from your mailing list. Your “Context is King” piece of fluff nearly did it.

What you call “Networked Media” is not what you think it is. Giving people the ability to say/share something does not give them the ability to say/share something interesting, nor does it absolve them from the legalities of copyright law. If 60% of YouTubes traffic stops, and it looses even 50% of it’s most popular content, how clever will the US1.65 billion investment look then?

M

[Lucinda]

rich successful people really shit me
all I can say is that now youtube is going to be infultrated with ads. banners, popups and be prepared for a 10 - 15 second preroll before you can watch any video you upload.
I liked it the way it was. Seems money means more then the issue of community. I wonder what impact that will have on the sites growth and market?

[CHRIS SIMON]

Surely My Space was also bought for some of the same social networking reasons, although I appreciate the primary eyeballs motivation at the time. And hasn’t social networking been an evolving thing? Like wasn’t eBay a one-off online garage sale in the beginning; wasn’t Wikipedia the first encyclopedia you could really interact with…I mean how interactive was being allowed to edit entries! And one could go on….All the Napster clones or-really-anything to do with sharing music files, (including My Space and You Tube)….Connected audiences or networked media or a peer-2-peer thing has been here to stay before You Tube…The reason Steve ‘n Chad had big smiles (as anyone would based on the dollars) is also because their timing was perfect and the site was easy to use! I agree with all your astute comments Mike, but I think the magic equation of social networking will be fuelled by Google and News and media like that; but also driven by a global best of breed in user generated content…So, obviously, it would be healthy to see other You Tube’s and My Space’s crop up as they do-exponentially-anyway; but it will also be good to discover other ORIGINAL spaces that connect across a networked structure that takes ALL platforms-including mobile into consideration….Not something that appears on a mobile phone and hangs together on the internet….Something that just APPEARS and is media ubiquitous! But driven by its IDEA that instantly has all the world qualities and appeal of existing online communities, but is brand new….And where will a majority of the brand new come from….Well-other than me-(ONLY JOKING!); I think the very core structure of the interactive-creative-networking teams needs addressing worldwide and needs to acknowledge some of the ‘natural creatives’ who have been attracted to displaying and “connecting” their work or EXPRESSION across networked media like My Space and You Tube, Friendster, Facebook, FlickR, etc. Obviosly, Blogger and a whole range of other weblog tools will keep on keep on coming…..The industry often talks about training and half my recommendations to a majority of the ad fraternity worldwide often involves them “tagging” their way in to discover not only new talent, but new social phenomena across their existing brands. Some of the existing talent that already understands CONSUMPTION or how to measure it and FEEL IT, as far as trends are concerned, can be marvelously re-invented with the right ingredients of people who have been pretty networked or connected for most of their lives, but not as a job, as a PASSION. And then-ofcourse-there’s the young masses that simply grew up on and currently have access to create through networked structures and relatively easy-to-use tools….You come across dream teams to nurture every day………And YES – it’s all about COMMUNITY and what makes the best or most effective communities has always been about content matrices and context. So-I hope I’m not really repeating what you have already said Mike……I think it’s a brilliantly written piece and quite motivating……But one last thought about the BRAND industry…..I cannot remember now how many years ago that I said if I was in a worldwide big pitch in an advisory capacity and the BRAND just had to have a global multinational ad agency network-how wonderful it would be to see amongst the list of obvious suspects like the TBWA’s, BBDO’s, DDB’s, DRAFT FCB’s…....--GOOGLE! Offering the same level of creative and strategic competitiveness and network structure, etc. I don’t want to be too controversial in this statement or upset any of my agency contacts, but obviously Google already works closely with agencies and agencies work closely with Google. But for all businesses similarly profiled to Google, it goes well beyond the browser or just search and I cannot help thinking that Google as a New G Ad Agency or Next Generation Agency would be easier to internally build than a global agency network to build an internal Google….Because COMMUNITY, the IM metaphor (covering everything from instant messaging-through to emoticonning-through to animating-through to videoing-through to writing-through to blogging), and bubbling currents of social interaction are not just about networked media, they’re also about the core structure of BUSINESS that works and business that makes MONEY!

[Fred Schebesta]

I am keen to see what the lawyers do with all the copyrighted video content that is on YouTube. (Warner Bros vs YouTube Round II?)

[Ben Still]

@Marcus - gee, someone has their cranky pants on!
Nice piece Mike- I like your point about the possibility of reaching critical mass by sheer dumb luck. Perhaps it's just a matter of having a "new" name that sounds good to enough early adopters - in the same way that the name Google was fun and new when you first heard it. Something that just isn't there with "did you see XX on Google Video?"...

[Nathan Maguire]

In response to some of the comments, one word that seems to be missing from this whole debate is BITTORENT. Its still the most economical distribution model, accounts for roughly 50% of internet traffic and when meshed with superior compression algorithms increased traffic will mean the the portal model will cease to be a viable distribution model. For the true early adopters, i.e. the IT world, it has been for many years now. YouTube is a bit of fun for us, but has not been the real meat in anyone's sandwich that I know of. The obvious strategy is for YouTube to become an indexing plaftorm for online video...isnt that what Google is best at...?

The digital-age old question will follow; how to monetise this...? At the risk of assuming the role of Devil's advocate in the same breath, does it even matter? If its popular enough surely subtle non obtrusive advertising will be enough to get an advertiser's message across. U2 made more money from their last world tour than from album sales, so self promotion alone appears to pay well enough.

So in summary:

Phase I - YouTube
Phase II - YouTube Indexing + Bittorent + Compression

[CHRIS SIMON]

You know Mike, I’ve never one million percent subscribed to your 4th Estate or ‘on-the-couch-jobs’; if you’ll forgive the non-intended innuendo pun; but I’ve got to hand it to you-your TB piece on the “You Tube Becomes a ‘Me Too’ Google If They’re Not Careful” debate has fuelled my fire! I’ve visited some of the other simultaneous worldwide debates-blogs-whatever (including some of my astute young uber colleagues in London, New York, Malaysia and Shanghai); but I think your “opening piece” was still cool and not just written by a guy who is obsessed with the cash cow news worthiness…..Not at all….Your comments on networked media and social technologies, in my MODEST opinion-are almost perfectly sound. And you know-some of your detractors, who go on about how they LOVED You Tube ‘as was’ and are concerned about it becoming a future thoroughfare for all kinds of intrusive advertising-rather than well executed interaction that does not interfere with its current flow, ambience and straightforward user-friendliness (or WYSIWYG tendency) or download-upload times-no matter what their network speed; have a GOOD POINT! Oh, by the way, I hope you don’t mind my occasional use of caps and the like…some of the die-hard netiquettes’ just wont quit on the rules they think their culture has, (even the new ones and born again ones)…..BUT please mark my words;-Chen and Hurley just chucked any rule book there ever was out-their-interface and GREAT….Good on ‘em! And rest assured they (with strong influence from Google) will be visiting Mobile Central and all kinds of other ways of making their community bigger, stronger……Ubiquitous…..even more user generated, “mashed and meshed”, behavioral, whatever……A Super-Site-of-Connection…..I mean if Peter Gabriel was 18 now, (wearing a red dress and foxe’s head) he would love to walk through it and gatecrash everyone’s contribution….And-actually-my more current peers, many DJ’s and bands like Arctic Monkeys would do exactly the same, if they could really UGC themselves into that environment….It’s funny how my peers over the years have often been of the monkey or monkees family….Oh yeah…that’s where we all come from! Actually-I saw a local ad writer the other day-whose also quite a talented stand up comic and his You Tube show idea was quite well branded and really thinking about the space and the environment! So I can ENTIRELY sympathise with a lot of hardcore users and even just admirers and DEFINITELY early adopters who will naturally be currently thinking that Google, (because-remember from my previous comments-Google ‘aint multinational ad agency network…..yet….) ‘might’ turn the current YOU TUBE look ‘n feel into an online billboard and-actually-I agree-they’ve got to be damn careful not to polarise. Naturally, I guess they’re working on the theory or copying the My Space model, thinking there will never be any boycott because of my favourite word…being ubiquitous…..but you know what….If you consider the realms and realms of authoritative statistics – local and global on the growth of the online ad business and-indeed-its impending spill into the mobile handset…..SPACE will always be a problem-unless it really does become generically a my space for a my person, for you, for every single consumer individually! All the other big boys – particularly the astute Ninemsn, who I’ve always ‘sort of’ respected, at one stage were talking about congestion……
So the answer is not pull downs, pull ups, banners from heaven, more video and Flash-flies of neon city……no matter how “cool” they try and make it….I reckon it’s about what it’s always about-YOU. I mean that’s what it is YOU Tube. There’s been so much dribble from the battle of the carriers about not releasing that statistic and this statistic and waiting another five million years for 3.9……4G to really, really start happening, so you could really persuade the only two surviving Beatles to sing the real song! The point I’m making (OR TRYING TO; I HEAR YOU SAY!) is that the online marketing fraternity worldwide have been incredibly smart with a lot of the use of their data, (well outside of the Google equation)….It’s what some of the greatest search marketing strategies were built on in the UK alone, (well B4 Google even offered search on their rate card) and there’s hundreds and thousands of other marketing-creative-interactive sub sets that can be considered to try and keep the authenticity of what Chad ‘n Steve started almost by default and what became driven by the best drivers I’ve ever wanted on my team-THE WORLD PUBLICS!

Whoever and whichever team/s become involved in the You Tube WORLDWIDE advertising and commercial model might be able to begin $UCCE$$FULLY by not calling it an advertising or marketing model, but making absolutely certain that everyone-including the user would fall in love with paying for it!!!!! That’s everyone folks. The user first (buying the brands) and then every ad group, media owner and brand in the world and then every metaphor of game, music, entertainment, community, experience, etc….Without congestion…and it can be done…..I mean for years now-it’s been about looking at the real estate-facilitating a dialogue in it-merging genres via target usership in it-closely looking at its usership as it’s happening-letting its usership speak back and seemingly control some of its commercialisation-and then become CREDIBLE and AUTHENTIC, by not being a billboard, but still writing millions and eventually billions in BRANDED paid-for involvement…. I just hope and pray that they – whoever they are – THINK about it HARD……You know why?….Because with the greatest of respect-Chad ‘n Steve and Google just got “too close” to their own product…….But I for one, would like part of my burial to be ‘utubed’, (which of course means guys-u’ll have to utube for at least another 30 or so years, he he he); because then if you get it wrong, I can come back and haunt you with those childish “I told you so” mantras that I’m so renowned for!!!!!Alternatively I could offer advergames in hell….And no-I’m not selling that one yet…Sorry guys…. ©hris Simon-Bracket Boys-on his way to being kept up again by lovely demanding clients…12.10.’06-Sydney. NB-Do they do cremation on You Tube, (I think the latest version of Flash……….)?!!!!!!

[Ken Rutkowski]

My buddy Chris Simon of The Bracket Boys drew this to my attention....

YouTube was one of the smartest things Google has done. The only thing I am wondering is why the YouTube guys took stock instead of cash since the Rule 144 restricted stock will make them hold on for 2 years which is smart for Google since they lock the founders down. Also, if there was any company to buy YouTube, Google was probably the optimal candidate since YouTube really hadn’t figured out a business model yet and Google will inevitably figure out a way (if they haven’t already) with its 1,500 Ph.Ds and its advertising product depth. Their self-serve AdWords/AdSense marketplace could be easily catered to video and they are already in the midst of developing that out for video. It is especially interesting to note that CPMs for video are 3-10x higher than those of text and banners. With YouTube, they can do a lot of different experiments since they have 100M videos to work with every day. That’s a lot of opportunities to do some A/B testing.

In regards to the copyright issue, had any media company (i.e. Viacom, Time Warner, etc.) bought it, there would have caused in awkward copyright mess a la MP3.com (see Vivendi Universal) and Napster (see Bertlesmen/Hummer Winblad). Google, with its god-like position as the search leader, wields a lot of power in the new Internet age and I think very few media companies want to tangle with them in court especially as they are looking at marketing partnerships with Google since it has the power to steer audiences in as well as away from them. In regards to Mark Cuban, his comments were really designed to deflect criticisms of himself as he is the poster child of the over-pay, under-achieve bubble buy of the dot.com days. I think YouTube will be way more fruitful for Google than Broadcast.com was to Yahoo. It is ironic to note that Google’s stock went up almost $10 per share representing $2.5 billion in market valuation on the rumor it was buying YouTube. That meant that the rumor of buying YouTube already paid for the actual acquisition of YouTube plus returned another 67% ROI by the time it was announced after market. It’s also funny the incestual nature of Silicon Valley since Sequoia was on both sides of the fence.

Ultimately, I think that the founders of YouTube were smart to take the money and run. They were running out of money because of their bandwidth costs and limited revenues which meant they would have to dig into the well again and get diluted more and since they were not going to get much more than $1.6B, there was no point to wait. They were also starting to get a lot of heat as evidenced by Chad Hurley’s poor panel appearance at AlwaysOn where Michael Robertson and Kara Swisher (WSJ) just beat him up on having no business model as well as the imminent lawsuits facing YouTube from Universal Music and Warner Bros. As a part of Google, it will disappear into the Google machinery and its numbers integrated so we will probably never know if it will ever make money. The rumor was it was losing $2M in month in just bandwidth costs alone but what’s $20-30M in losses to a Google that can make that much in a few days.

Lastly, I think the deal is a brilliant defensive land grab. Consider that in the last year, Google has bought 5% of AOL for $1B to lock up search and ads on this Top 5 site, $900M to Fox/MySpace to lock up search and all ad space of the #2 and soon to be #1 traffic site and now $1.6B for YouTube to lock up the #1 video and #5 overall site on the web. That means for a paltry 3% of their market cap ($3.5B out of $125B), they have locked up ad space for 3 of the top 5 sites on the Internet and they themselves are #3. That’s world dominance for you.

[Dylan]

If you can't beat them, buy them
http://www.systemvideoblog.com/2006/10/if_you_cant_bea.html

[Kevin Kroll]

Thanks Mike,
your article into the YouTube buy out was most insightful.
Luv your work.

[Laurel Papworth]

"The era of passive media consumption is being replaced with something requiring far more audience involvement. Its what I call 'Networked Media'. "
Actually Mike, Networked Media is a term used by Seth Keen, lecturer in Media at RMIT University in Melbourne. His NETWORKED MEDIA blog is here http://networkedmedia.adc.rmit.edu.au/

Yes you are right, YouTube's biggest error is in not allowing downloads (form shifting) to other devices. Why? Not because we all want to play things on our video iPod or PSP but because the ability to make a mashup of someone else video is so much harder. To keep the conversation going, video responses are integral to the dialogue. With Meta-cafe and others giving users $10,000 per 2(?) million downloads and a subset thereof, there are enough incentives to move videos off YouTube onto other sites. Google's original philosphy of not owning the social network but the infrastructure may yet prove to be the correct one!

[Red Sole Shoes]

It's fun.Very worth to read.

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